Credit appraisal is an very important traditional bank function. Credits otherwise called loans are granted to customers who are able to meet the bank’s basic credit criteria. When appraising customers credit, the bank seek answers to a lot of questions some of which includes the four (4) Hows of credit.
Here are the four (4) Hows (loan officer questions) you must provide appropriate answers to before your bank will see you as a customer truly in need of loan.
1. How come?
How come you need money? The loan officer needs to establish that there are true gap/s in your business or finances before he proceed with your request. While gap types varies from individuals to business, it is very important that the bank establish that finance gap exist before other questions are asked.
Need for finance for individual may be for personal, auto, mortgage or even credit card while the need for finance for companies or organization may include overdraft, Short term needs, machineries and equipment or capital projects. The how come question precedes all other questions and need must be established so the bank don’t throw money at a customer who does not required funding.
2. How much?
The refers to the loan amount. The loan officer want to know how much you need? This is a very important question that you must provide answer to. The amount you need depends on what the loan is needed for and your ability to pay back. The bank will not grant a facility that is more than what you need thus the amount must be thoroughly established during the loan appraisal period.
Facilities like auto loan, mortgage, asset and equipment finance and capital project are jointly financed by the bank and the customer in a ratio comfortable to the bank and agreed with the customer while overdraft, personal loan and credit card limit are based purely on the customer’s cash flow and ability to pay.
3. How repaid?
The source or repayment is very important to the bank as much as the customer’s reputation. The source determines among other things, the amount of loan the customer gets and the length of time it will take the customer to repay. The source also includes the collateral option the customer is providing as a secondary repayment source. Irrespective of the collateral however, the customer must provide adequate conviction to the bank that he has the ability to repay the loan from the primary source of repayment.
Primary repayment option for individuals includes salaries and other personal earnings. While business cash flow and domiciled payment remains the primary repayment option for businesses.
Gratuity and retirement benefits including employers guarantee, cash collateral and mortgage options are fall back options for individual loans. For businesses, cash collateral, mortgage options are some of the fall back or secondary repayment options for the bank.
4. How long?
This refers to the loan tenure. The loan officer will also like to know how long will the loan be repaid? The amount you get and your repayment source are two big determinant of your loan tenor. Loans without collateral have shorter repayment periods than loans with a good secondary repayment option.
Tenures for short term loans like LPO Finance, IDF and CFF are shorter because they are transactional loans. While revolving loans like overdraft are also short because of the need for monitoring. Mortgage, Project Finance have longer tenures because of the secondary wayout option provided by the customer.
Please note that credit conditions varies from one bank to another. This is just a general guide meant to increase your knowledge about how credit appraisal works.